If I am 26 and can only save about $125 per month...?

Question

If I am 26 yrs old and can only afford to save about $125 per month, what is the best thing to do with that money to save for retirement? Or even to simply save?

If I am 26 yrs old and can only afford to save about $125 per month, what is the best thing to do with that money to save for retirement? Or even to simply save?

As of right now the company I work for does not have a retirement account and in a couple of months I will have paid off my credit card debts (that's actually when I will start saving it).

Answer 1

Geez, after reading some of these responses, it's like the blind leading the blind here.

First of all, banks/credit unions are one of the absolute worst places to go for investments or investment advice. The employees who work in banks and are so called financial planners are always under-trained, under-paid and the investments they can offer are extremely limited.

Second, CPA's do not offer investment advice or set up any types of investment accounts. Most CPA's don't know the first thing about various types of investments other than how the money is treated for tax purposes. Any CPA offering investment advice is completely out of line.

Third, some people mentioned annuities and other various qualified retirement plans. Ok, while a qualified retirement plan such as a ROTH IRA certainly seems like it would be a logical thing for most people, in this case, it absolutely is not. You mentioned that you have credit card debt. It also sounds like there are no reserve funds accumulated. When you are first getting yourself out of debt, and have limited ability to save money, there are inevitably going to be snags along the way - if you were to put it into a retirement plan or annuity, you have just taken that money and essentially locked it up for the next 33 years, until which time you would be eligible to remove it without tax penalties.

What you need is very simple - you need a general savings account with at least $5,000 in it before you even begin worrying about investments. General savings accounts don't pay much interest, but that does not matter. At 3%/year, the interest on $1000 is only $30. At 6%, it's $60. The difference is insignificant - it's the contributions that are the most significant.

Saving $5,000 at $125/month seems like a huge mountain to climb, but there will be salary increases along the way which will allow you to save up more each month. Once you have built up $5,000 as a safety net, then you can start making more than the minimum payments on the credit cards. Until then, just pay the minimums. The interest may be high, but the alternative is not having the money available in a time of need. It will not hurt you to pay the additional interest for the next couple years while you establish that safety net.

Only once you have your safety net and have paid down the credit cards is when you should be considering alternative investments.

Answer 2

Its fabulous that you want to save for retirement and $125 a month is a great place to start !!

I would start a ROTH IRA with a mutual fund within it. ( Keep in mind that an IRA is simply a bucket for holding something. This is where the mutual fund comes in.) You can be saving yet down the road if you find a home you want to purchase and need some $$ for that, you can dip into this without any penalties or tax. You can only remove what you put in. The interest gained must stay in.

Also be sure to be taking advantage of any employer plans that match your contribution. If no matching then also start an Traditional or Simple IRA (which ever one fits you). Get that growing as well even if you have to break up that $125 in to two parts so you can contribute to both.

Any bonuses you receive be sure to add them to the IRA's and soon your money will be making money all on its own.

Only YOU can plan and take care of your financial future. No one will or should care about it like YOU should. Jump in and get it going.

Happy Investing !

: )

Answer 3

Good question. Here is what my Corporate Finance Instructor stated.

The earlier you start to save for retirement the more it accrues interest and compounds interest. The example he showed demonstrated that a person who saves earlier is able to retire with more money than a person who puts in even more at a later age.

So, I'd set aside the money until you have about $500 (which should be about 4 months) and then find an investment firm such as Fidelity Investments or Prudential. Ask the company of your choice how to set up a retirement fund, such as an IRA or an annuity. Often, this can be done on a Pretax basis (even better so your taxable income gets reduced) and can be set up as a payroll deduction.

Answer 4

Forget banks (too expensive and their funds do not have a good history). Forget Prudential (load funds, also not the best). Once you have paid off your debts, and have a 3 to 6 months of living worth emergency fund set up in a quickly gettable saving/money market account, then go to www.troweprice.com. They have some great mutual funds (especially for retirement). Plus, they are the only ones I know of that only require an initial investment of $50 with their "Automatic Asset Builder" account. You must agree to transfer at least $50 per month, every month from your bank to them until you reach their normal $2500 minimum.

Answer 5

I think it depends on if you have any debt or not.

If yes... after you save $500 - $1000 for a starter emergency fund, you should put the money towards your debts each month. Once you're out of debt, you're free an clear to save a lot more.

If no, make sure your have an emergency fund of 3-6 months of expenses, and put that into a savings or money market account. Beyond that I would use it towards retirement in either a 401K or Roth IRA.

Answer 6

$125 a month, is better than most. My advice like many other people, would be to contact a financial planner at your bank or credit union. Many of these people will sit down with you and discuss your current financial situation, and what you goals are, and can formulate a plan to help you acheive your goals. The one important thing to remember is that the amount of money you save is more important when you and don't have any credit card debt. It doesn't make sense to save $125 when you are incurring credit card intrest.

Answer 7

does your job have a retirement plan? if so, participate in that...even if it's only 4% of your gross...because it comes out pre-tax.
if not...put that money in a savings account and try to put any amount in there whenever you can. once it is built up to $2000 take that money and get a roth ira. you have to deposit into the ira every year and need a minimum of 2000 to start one. or you could take $2000 and get a cd for a minimum of 10 years...have them take the interest and deposit back into the cd.

Answer 8

As the 'rules' of finance and saving are constantly changing? Best to see a CPA about this one -

Answer 9

does your business offer a 401k because that would be your best bet. If not you can set up a retirement account at your local bank/credit union.

Answer 10

go see you bank they should have a investment planner that is free to talk too. he/she will lead you in a great path. but good ol' savings account is better than nothing.